The proposed merger of AT&T and Time Warner was announced on October 22, 2016. Seventeen months later, the Department of Justice’s antitrust challenge to the AT&T/Time Warner merger is finally going to trial this week. The opening arguments are scheduled for Wednesday, March 21, while the first two days of the week are being devoted to motions in court before U.S. District Judge Richard Leon, who is presiding over the case. The trial is expected to last six to eight weeks.
These two days of motions, as well as the motions made by each party earlier this month, provide important insights into how each side plans to make its case. Most of the early motions being addressed by Judge Leon are on admissibility of evidence.
Both DOJ’s Complaint that initiated the case last November and its pre-trial brief earlier this month gave heavy emphasis to statements made by executives and employees of AT&T, Time Warner, or DirecTV (a subsidiary of AT&T) that the DOJ claims show that the merging parties recognize the potential for anticompetitive harm. AT&T objected to many of the documents DOJ planned to use as exhibits, claiming they did not identify the author or context, and therefore should be considered as unreliable hearsay or irrelevant. Judge Leon appears to have generally agreed with this objection, unless the author can be identified and can be available for cross-examination. Whether these documents are admissible may affect the testimony of expert witnesses the DOJ presents who relied on these documents in forming their views of the merger.
The DOJ also appears to be relying on testimony and documents from rival companies, so the parties are arguing before the court over whether and how to keep information from rival companies confidential. Relying on testimony from competitors in a vertical merger case has significant potential pitfalls for DOJ. The antitrust standards for reviewing mergers focus on harm to competition, which is not the same as harm to competitors. Competitors might object to the merger because then the merged company will harm them by being better able to serve its customers. In anticompetitive horizontal mergers, the injured parties will usually be the downstream customers or the upstream suppliers of the merging companies. Since they compete on different levels from the merging companies, it is usually fairly easy for a court to distinguish between harm to competition and harm to competitors.
In vertical mergers, however, distinguishing between harm to competition and harm to competitors can be much more difficult. Complaining firms are likely to be at the same level in the supply chain as at least one of the merging parties, so the harm alleged by the government could be harm to a competitor that actually benefits customers. Such witnesses and their documents must then be viewed with some skepticism by the court, because they may well be complaining about being harmed by having to face a stronger and more efficient competitor after the merger.
Judge Leon has previously ruled that AT&T and Time Warner cannot present that the DOJ had improper political motives in bringing the case. AT&T and Time Warner largely dropped this claim in their pre-trial brief. It appears that Judge Leon is not going to give much leeway in court to AT&T and Time Warner in arguing that this merger is being treated differently from other mergers or that DOJ had an improper motive for challenging the merger and instead is directing the focus of the trial on the economic impact of the merger.
Judge Leon had also previously denied a motion by DOJ to exclude evidence the merger parties plan to present that they are offering to agree for seven years to arbitration in any Turner Networks carriage disputes with cable systems and other programming distributors that compete with ATT’s DirecTV and U-Verse. The combined companies would also agree not to “black out” these channels while the dispute is before an arbitrator. This ruling could be important at trial. In its pre-trial brief, the DOJ indicates that it will rely on case studies to show the economic impact of programming that is removed from cable system when programming providers and distributors fail to reach agreements on prices. If, however, the final decision on prices in programming carriage dispute is made by an arbitrator and blackouts are prevented during the arbitration process, then much of the harm alleged by DOJ would not occur. Certainly the DOJ will argue that such arbitration is not sufficient, making this arbitration offer a contentious issue during the trial.
The AT&T/Time Warner merger has important implications for other vertical mergers. Last year the DOJ declined to challenge, or even seriously investigate, the vertical merger of Amazon and Whole Foods. Other currently proposed vertical mergers include health insurer Cigna trying to buy pharmacy benefits manager Express Scripts and CVS looking to acquire health insurer Aetna. Various advocacy groups are also calling on the DOJ to reconsider the 2011 merger of Comcast and NBC Universal, which raises very similar vertical antitrust issues as the DOJ is alleging for the AT&T/Time Warner merger.
For a substantive analysis of the merger and the context in which it should be reviewed, see my February 8, 2018 Perspectives from FSF Scholars entitled “The Proper Context for Assessing the AT&T/Time Warner Merger.”